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CHAPTER 11
VENTURE CAPITAL VALUATION METHODS
True–False Questions
projecting both intermediate and terminal/exit flows to investors.
flows or to find an acquirer for the venture.
contributed in the first venture capital round.
known as the direct comparison valuation method.
rate implied by a comparable ratio is known as direct capitalization.
accompanying dilution in order to meet projected earnings will result in the
investor’s not receiving an adequate number of shares to ensure the required
percent ownership at the time of exit.
equity or deferred equity compensation be structured into any valuation.
will still receive first claims on the venture’s net worth at exit time.
investment using only the business plan’s explicit forecasts, discounting it at a
bank loan interest factor.
that equates the present value of the cash inflows received with the initial
investment.
terminal/exit flows to all the venture’s owners.
terminal/exit flows to founders.
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injected by new investors.
T. 14. Staged financing is financing provided in sequences of rounds rather than
all at one time.
founders and the investors currently seeking to invest.
of the cash flow in the terminal value period.
equates the present value of the cash inflows received with the initial
investment.
usually be lower than the discount rate that would be applied to the business
plan cash flows.
flows in the same year.
rate across scenarios.
different scenarios, as well as their probabilities, into the valuation process.
Note: The following TF questions relate to Learning Supplements 11A and 11B:
earnings are paid out in the form of dividends.
the Delayed Dividend Approximation (DDA).
not assess capital charges for idle cash.
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later-stage cash inflows, the VCSC and DDA methods will typically give
lower valuations than the MDM and PDM.
later-stage cash inflows, the VSCS will give a higher valuation than the DDA.
T. 8. The DDA and VCSC methods give the same valuation.
Multiple-Choice Questions
a. venture’s ability to generate cash flows
b. ability to convince an acquirer to buy the firm
c. the amount of its short-term liabilities
d. both a and b
e. all of the above
venture investor’s target return, one must consider the:
a. cash investment today and the cash return at exit multiplied by the
venture investor’s target return, then divide today’s cash investment by
the venture’s NPV
b. cash investment today and the cash return at exit discounted by the
venture investor’s target return, then divide today’s cash investment by
the venture’s NPV
c. cash investment today and the cash return at exit multiplied by the
venture investor’s target return, then divide today’s cash investment by
the venture’s NPV
d. cash investment today and the cash return at exit discounted by the
venture investor’s target return, then multiply today’s cash investment
by the venture’s NPV
new equity issue is known as?
a. pre-money valuation
b. post money valuation
c. staged financing
d. the capitalization rate
equity issue is known as?
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a. pre-money valuation
b. post money valuation
c. staged financing
d . the capitalization rate
known as?
a. pre-money valuation
b. post money valuation
c. staged financing
d. the capitalization rate
[Note: Use the following information for Problems 6 through 11.]
A potential investor is seeking to invest $500,000 in a venture, which currently
has 1,000,000 million shares held by its founders, and is targeting a 50% return
five years from now. The venture is expected to produce half a million dollars
in income per year at year 5. It is known that a similar venture recently
produced $1,000,000 in income and sold shares to the public for $10,000,000.
provide the venture investor’s target return?
a. 33.33%
b. 75.94%
c. 12.76%
d. 15.00%
order for the investor to earn his target return?
a. 3,156,276
b. 1,578,138
c. 4,156,276
d. 2,578,138
a. $0.1939
b. $0.1203
c. $0.3168
d. $0.1584
a. $120,300
b. $316,800
c. $158,400
d. $193,900
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a. $658,354
b. $499,954
c. $408,377
d. $249,977
a. $500,000
b. $5,000,000
c. $1,000,000
d. $100,000
having an equity component in employee compensation?
a. the expected deferred and tax-preferred compensation allows the
venture to pay a lower current compensation to employees
b. as a way to motivate employees to strive for the same goal of high
equity value
c. because any dividends received as part of the equity compensation
reduces taxable income
d. both a and b
e. all of the above
venture’s wealth?
a. banks giving loans to the venture
b. convertible debt holders of the venture
c. initial equity investors of the venture
d. participating preferred equity holders
followed by expected mean cash flows at the end of the first, second, and third
years of $40,000, $40,000, and $35,000. What is the internal rate of return?
a. 13.9%
b. 14.7%
c. 16.2%
d. 17.2%
e. 19.2%
a. price/expectations multiple
b. price/earnings multiple
c. profit/EBIT multiple
Chapter 11: Venture Capital Valuation Methods
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d. profit/earnings multiple
e. price/EBITDA multiple
information: stock price of a comparable firm = $20.00; net income of a
comparable firm = $20,000; number of shares outstanding for the comparable
firm = 10,000; and earnings per share for the target firm = $3.00.
a. $10.00
b. $20.00
c. $30.00
d. $40.00
e. $50.00
information: total market value (or capitalization value) of a comparable firm
= $200,000; net income of a comparable firm = $40,000; number of shares
outstanding for the comparable firm = 20,000; net income for the target firm =
$15,000; and number of shares outstanding for the target firm = 10,000.
a. $5.00
b. $7.50
c. $10.00
d. $12.50
e. $15.00
following information: value of target firm = $4,000,000; net income of target
firm = $200,000; and net income of “comparable” firm = $500,000.
a. $4 million
b. $7.5 million
c. $10 million
d. $12.5 million
e. $15 million
information: value of target firm = $4,000,000; net income of target firm =
$200,000; stock price of “comparable” firm = $30.00; and 300,000 shares of
stock outstanding for the comparable firm.
a. $450,000
b. $500,000
c. $550,000
d. $600,000
e. $700,000
expected to be $40,000 at the end of four years from now. A comparable firm
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currently has a stock price of $20.00 per shares; 100,000 shares outstanding;
and net income of $50,000.
a. $1.0 million
b. $1.4 million
c. $1.6 million
d. $2.0 million
a. first-round
b. second-round
c. incentive ownership round
d. a and b
e. a, b, and c
scenarios:
a. black hole scenarios
b. living dead scenarios
c. both a and b
d. neither a or b
method?
a. venture capital method
b. expected present value
c. utopian discount process
d. none of the above
Following are MC questions relating to Learning Supplements 11A and 11B:
a. 1. When a firm has growth that only meets, rather than exceeds, the cost of
capital, we would expect its price-earnings multiple to be approximately equal
to: a. the reciprocal of its required return on equity
b. its earnings per share
c. its book-to-market ratio
d. its debt-to-value ratio
a. DDA and VCSC
b. DDA and PDM
c. VSCS and MDM
d. MDM and PDM
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under:
a. DDA
b. PDM and MDM
c. VCSC
d. initial book value of equity